Break-Even Analysis

The break-even point is the point at which total revenue equals total cost. At this point, the company is neither making a profit nor a loss.

The formula for calculating the break-even point in units is Fixed Costs / (Selling Price per Unit - Variable Cost per Unit).

The formula for calculating the break-even point in dollars is Fixed Costs / (Contribution Margin).

The contribution margin is the difference between the selling price per unit and the variable cost per unit.

The contribution margin is greater than the break-even point because the contribution margin includes the fixed costs.

Fixed costs increase the break-even point because they must be covered by the contribution margin before the company can start to make a profit.

Variable costs decrease the break-even point because they are only incurred when the company produces and sells units.

Increasing the selling price decreases the break-even point because it increases the contribution margin.

Increasing volume decreases the break-even point because it increases the total revenue.

A profit is when total revenue exceeds total cost. A loss is when total cost exceeds total revenue.

The break-even point is less than the profit margin because the profit margin includes the fixed costs.

The break-even point is greater than the degree of operating leverage because the degree of operating leverage is a measure of the company's fixed costs.

The break-even point is less than the margin of safety because the margin of safety is a measure of the company's ability to absorb losses.

The break-even point is less than the target profit because the target profit includes the fixed costs and the desired profit.